Cigarette maker seeks FED review

Says duty rise fuels illegal trade, exacerbates govt’s fiscal woes

ISLAMABAD:

The chief financial officer and executive director of Philip Morris (Pakistan) Limited has asked the government to reconsider the substantial hike in federal excise duty (FED) in the upcoming budget, which will help combat illicit trade and sales of smuggled cigarettes.

The high FED “not only hampers the flow of fiscal revenue and legal cigarette sales but also fuels growth of the illegal market, exacerbating the government’s financial challenges,” he remarked.

Speaking to a group of journalists, CFO Muhammad Zeeshan cautioned the government that if the illegal cigarette market continued to thrive, as noticed after the hike in excise duty, the state would not be able to collect the anticipated tax revenue.

He underscored the need for across-the-board implementation of laws regulating the tobacco industry and providing a level playing field for legal cigarette companies. “These measures are essential to safeguard government revenue and protect the documented tobacco sector from further decline.”

He pointed out that the government had increased FED by 200% in the current fiscal year. As a consequence, Philip Morris (Pakistan), one of the two documented tobacco companies, endured almost 70% decline in sales and 60% decrease in production over the past two months – March and April 2023.

“This downward trend is expected to persist in the coming months due to the rise in illicit cigarette sales,” he expressed fear.

In the quarter ended March 31, 2023, the company contributed to Pakistan’s economy by paying Rs5,990 million in excise duty, sales tax, and other government levies.

However, this amount represents a drop of 16.4% compared to the previous period. It can primarily be attributed to the decrease in sales owing to the price increase enforced by excise regulations in February 2023.

The company CFO stressed that the “unforeseen and unparalleled rise” in excise taxes presented an opportunity to the illegal tobacco manufacturers to expand their operations and gain ground, while the tax-paying tobacco companies suffered.

Consequently, the government’s revenue objectives from the tobacco industry are likely to be limited to below Rs200 billion while the target was set at Rs260 billion after the FED hike in February.

The documented tobacco sector contributes a significant 98% of the total tax revenue from the tobacco industry whereas the illegal cigarette manufacturers contribute a mere 2%.

Zeeshan called on the government to take decisive measures to combat the illegal cigarette market, which had captured more than 40% of the market share and which was projected to escalate to 50%, making Pakistan one of the largest illicit cigarette markets in the world.

Additionally, Prime Minister Shehbaz Sharif has himself acknowledged a Rs100 billion loss due to tax evasion by the illicit tobacco companies.

Furthermore, he emphasised the importance of installing the track and trace system in all cigarette manufacturing units. Currently, this system is being implemented in only a few tobacco companies.

Published in The Express Tribune, May 26^th, 2023.

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